Summary
- We were blindsided by the abrupt change in covariance between stock, equities, from NEGATIVE to POSITIVE. We bought stocks on our forecast of falling yields, but got falling equities instead.
- March 24: looked for a "dead cat bounce" to exit errant equity longs. Got it; exited long ES and long YM, but undershooting long RTY had to be hedged short.
- March 25: Another small dead cat bounce expected today, but unlikely to be large. Looking to hedge short residual longs in big way at breach of YM support levels GTC.
- We believe that this change in covariance in yield and equities -- back to positive -- may not last. It's probably just some equity players frontrunning the quarterly rebalancing. @Lowerlightbebeaming explained it well -- it's taking profits from the equity run-up, and plowing the proceeds back to the bond market. Simple rebalancing, put another way. Also that explains why there was profit taking from the long value-short hightech spread trades -- hence, RTY was hammered and NQ remained relatively unscathed.
- Here is what driving bond-equity rebalancing, which will be the underlying theme until end of Q4 2021. S&P Earnings Yield spread over 10Yr yield will continue to shrink, and becomes less competitive vs bond yields until Q4 2021. The Fed's ERP Model suggests that the recent surge in the 10Yr Yield will drive a rebalancing towards bonds away from equities until late Q4 2021.
MARCH 24, 2021
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
robert.p.balanModeratorLeaderOwnerMar 24, 2021 9:11 AM
It looks like there is one more dip in the ES and other indexes before we can expect a rally in stocks.* Hopefully, even if it is just a "dead cat bounce".*
Correspondingly, that would set up wave 4 in the 10yr yield, followed by wave 5 to the downside, which ends the current downward sequence in yield.
Strangely, it may be the NQ which will benefit from a recovery in yield -- just looking at it from EWP perspective of course.
The paradigm has shifted once again -- equities and yields are rising and falling TOGETHER once again. Unfortunately, PAM was stuck with the previous negative covariance -- we bought equities on the analysis of falling yield, which turned out to be correct. PAM was blindsided by the sudden change, but we may still get out of this jam with minimal damage.
But to the be honest with you -- we believe that this change in covariance in yield and equities -- back to positive -- may not last. I think it is just some equity players frontrunning the quarterly rebalancing. As Lowerlightbebeaming explained it well -- it's taking profits from the equity run-up, and plowing the proceeds back to the bond market. Simple rebalancing, put another way.
Also that explains why there was profit taking from the long value-short hightech spread trades -- hence, RTY was hammered and NQ remained relatively unscathed.
But of course, the process will not go in a straight line -- that may enable us to get out of the errant longs, and go with the flow for a few days.
*Tim and I believe that after the quarterly rebalancing, the yield-equity covariance paradigm will go back to being negative, again.*
robert.p.balanModeratorLeaderOwnerMar 24, 2021 9:57 AM
We believe that the stimmy proceeds have not really shown up in the equity markets yet, with potential support from forthcoming bank share buybacks and dividend payouts. Bond market-wise, investors still believe that the Fed really want to push up inflation expectations (pressuring long end yields) while keeping front end rates zero-bound. I believe that is the quid pro quo arranged with the commercial and inv banks -- note that the yield curve is steepening which is pushing bank shares to the moon.
If pushing up inflation expectations is not an objective of the Federal Reserve, why is the US central bank buying up to 80 pct of the minuscule TIPs market, knowing that will push the breakeven rate (measure of inflation expectation) to the moon as well (see chart below)?
Perhaps I am reading too much into the situation, but it may explain why Fed Chair J. Powell is unfazed by the market's jumping to conclusion towards earlier rate hikes and earlier QE tapering -- he may not care much about yields rising, UNLESS it goes beyond a certain level (still unknown).
And even if he cares, some economic growth plus humongous stimulus money in the pipeline does argue for risk of future inflation surge down the road --not this year, more likely next year. But the long bond yields will of course rise because the bond term (RISK) premium from 5yr up to 30yr duration are all rising sharply, due to that inflationary outlook. You of course remember that the bond term premium composes like 65 to 85 pct of a bond yield -- hence, back end yields have to rise correspondingly.
Our fear is that the Fed may overplay its (in the background) manipulation and push inflation expectations too high beyond a healthy limit -- and the equity market blows up in their face. Maybe the Fed believes they have the tools to control unwanted rise in long term rates, but it is still dangerous to play with fire, when the central bank does not have too. The incoming flood of helicopter money is enough to manufacture the inflationary situation (and higher long term yields) that they want, so there is no need to contrive other means to reach that goal. It is pure overkill.
freer7Mar 24, 2021 12:50 PM
Can anyone verify if this is true?
Speculative options activity is extremely pessimistic.$QQQ Put activity now among the highest spikes in history – much higher than MAR 2020.
Traders have given up on Growth & Tech – but some key names are showing *strength*, after quietly basing for months.
Follow the trend. pic.twitter.com/4UoL8ADmgO
— Macro Charts (@MacroCharts) March 24, 202
IS THE YOLO TRADE COMING TO AN END?
In today's @Markets newsletter I wrote about some signs -- from call option volumes, to NBA top shot prices, to Google searches for the word "Chamath" -- that hint that the speculative fever is cooling down.https://t.co/Pl5nZqsNJq pic.twitter.com/eFT5APrDfa
— Joe Weisenthal (@TheStalwart) March 24, 2021
centexlifeMar 24, 2021 12:58 PM
Vixsquared releases data within the hour, this from yesterday
centexlifeMar 24, 2021 1:02 PM
@vixsquared Yesterday the data was just the opposite from the above story line. The ratio is not a constant and moves throughout the NYC open period. nopechart.com tracts the data real time and is available live without cost. The day ended very bearish net puts to calls but I expect will open just the reverse this AM.
This was pre market today.
RM13Mar 24, 2021 1:22 PM
Delta neutral SPY at 100%, QQQ at 84%, bullish.. SPX needs to get over 397.6 to get over the gamma neutral hump..
bogeygolfMar 24, 2021 1:13 PM
why the sideways chop this last 2 months?
Bloomberg seems to be the only one that has this daily time series Global Liquidity Proxy. I wish I knew the methodology. Other sources I have looked at only have monthly versions.
gwizz1Mar 24, 2021 2:26 PM
bogeygolf could it come from this?
Alan.LongbonMar 24, 2021 2:40 PM
It is probably the big G5 bank balances added together similar to RBs G5 charts, tho his ones are change rate charts whereas the one above looks to be nominal. The tow match up as the change rate is falling now and the nominal chart is flat indicating no growth.
All flat and downhill until at least into June.
TimK123Mar 24, 2021 3:52 PM
NQ looking constructive:
kizunoMar 24, 2021 4:38 PM
timsufo And thank you for including the timeline!
LowerlightbebeamingMar 24, 2021 4:01 PM
Tim, that was fabulous! Exactly what I saw.
Call it whatever you want inflation, compounding interest etc but the law of nature will put the resources of life into the hands of the producers.
This rotation or rebalancing is a way resources change hands from non-producers to producers. When this recurring main event is done(it is never done or stopped but continues on a smaller scale that doesn't impact with such volatility), all working ships will rise with the tide. I think we might see it working today.
LowerlightbebeamingMar 24, 2021 6:26 PM
It bounces off 61.8% and must hold this test:https://www.tradingview.com/x/JKYRv4mK/
tradeenthusiastMar 24, 2021 6:37 PM
a little below 12850 would be a good place to set stop loss? Thx for taking time to post updates
nichaMar 24, 2021 6:44 PM
I am looking at .764 @ 12,818 for SL
LowerlightbebeamingMar 24, 2021 6:52 PM
Both are far enough and stop hunter might not go there.
TimK123Mar 24, 2021 7:32 PM
12872 is the 61.8% for NQ I think, so that area could prove pivotal.
tradeenthusiastMar 24, 2021 8:05 PM
Looks like NQ is on life support. Very close to an important support
RSI divergence is quite impressive for NQ, could be a help:
LowerlightbebeamingMar 24, 2021 9:29 PM
More of the same taking gain in biotech and technology rolling into treasury to keep the accuracy of the balanced fund name.
Mutual funds hold 2.5 trillion in treasury. Just imagine the gain they have taken in treasury to rotate into small cap, value, and cyclical and the rebalancing of their balanced funds.
robert.p.balanModeratorLeaderOwnerMar 24, 2021 4:37 PM
The equity markets have gone back to our acquisition levels for these ES and YM. long trades.
I expect a little more upside, but there is nothing certain in the markets. So you have a choice of bailing out at breakeven, or make a play for a little more profit, I hate to see trades that that have gone back from underwater see go back underwater again. I consider it good luck that we have gone back to breakeven. We will exit at breakeven. The RTY long trade is a different story and will need a little more work.
all PAM EXITS THE LONG SCALPERS TRADES IN YMM1 AND ES1, DCC DISCRETION -- ALL FUNDS.
*This order was filled. *
*ESM1 -- DONE AT 3925.25 -- SOLD 144 CONTRACTS OF ESM1 SCALPER LONGS FOR ALL FUNDS, INCL TRACKER AND EIGER*
*YMM1 -- DONE AT 32,612 -- SOLD 144 CONTRACTS OF YMM1 SCALPER LONGS FOR ALL FUNDS, INCL TRACKER AND EIGER*
robert.p.balanModeratorLeaderOwnerMar 24, 2021 5:02 PM
all PAM SELLS 144 CONTRACTS ESM1 AT 3937.25 LIMIT OR BETTER (BREAKEVEN), FOR ALL FUNDS
all PAM SELLS 144 CONTRACTS RTYM1 TO HEDGE 144 LONG RTYM1 SCALPERS AT DOWNWARD BREACH OF 2,170, FOR ALL FUNDS
robert.p.balanModeratorLeaderOwnerMar 24, 2021 7:00 PM
PAM SELLS 144 CONTRACTS RTYM1 TO HEDGE 144 LONG RTYM1 SCALPERS AT DOWNWARD BREACH OF 2,170
all Modify the threshold to breach of RTYM1 2165 (from 2170), to sell 144 contracts as short hedge for long RTYM1, GTC -- all funds
robert.p.balanModeratorLeaderOwnerMar 24, 2021 7:56 PM
Modify the threshold to breach of RTYM1 2165 (from 2170), to sell 144 contracts as short hedge for long RTYM1, GTC
*This order was filled.*
*RTYM1 - DONE AT 2164.70 SOLD 144 CONTRACTS RTYH1 AS HEDGE FOR RTY ,LONGS -- ALL FUNDS, INCL TRACKER, EIGER *
robert.p.balanModeratorLeaderOwnerMar 24, 2021 8:04 PM
Modify the threshold to breach of RTYM1 2165 (from 2170), to sell 144 contracts as short hedge for long RTYM1, GTC
*This order was filled.*
*RTYM1 - DONE AT 2164.70 SOLD 144 CONTRACTS RTYH1 AS HEDGE FOR RTY ,LONGS -- ALL FUNDS, INCL TRACKER, EIGER *
MARCH 25, 2021
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
paradigmMar 25, 2021 2:21 AM
@lowerlightbeaming - " Mutual funds hold 2.5 trillion in treasury. Just imagine the gain they have taken in treasury to rotate into small cap, value, and cyclical and the rebalancing of their balanced funds."
Beam......I do not understand your posting about mutual funds taking gains in treasuries and rolling into small caps, value and cyclical. I thought the trade now is going the other direction, i.e. taking gains in those equities and rolling into treasuries. Perhaps I misinterpreted. If you get a chance please help me clear this up in my head!
LowerlightbebeamingMar 25, 2021 2:56 AM
I was making a general statement about the power and effect of the mutual fund having 2.5 trillion in treasury which is more than Japan and China combined.
paradigmMar 25, 2021 3:24 AM
Thank you!
h.voiceMar 25, 2021 7:42 AM
On the assumption that D turns out to be right
ES
NQ similar
robert.p.balanModeratorLeaderOwnerMar 25, 2021 8:30 AM
The rebalancing should continue -- a wave 4 consolidation may be followed by final dip in the 10Yr yield to complete a large irregular correction (green box).
That yield progression may correspond to a further decline in the ES and other equities, completing a three-wave (zigzag) correction.
That final decline should also complete a similar three-wave (zigzag) correction in NQ, which becomes is Wave 2, followed by Wave 3 higher.
And RTY may be hammered one last time, completing a large irregular correction. New upcycle starts from there.
And we should get a similar three-wave correction (zigzag) in YM, completing the correction by month-end.
*We have various hedges which we intend to unwound (the short hedges only) at the trough of this expected decline. *
*But we still have some ES and NQ longs that will be at risk with further decline in equities. We hedge those with short trades using YMM1, and hope to unwind that short hedge when we see what looks like bottom.*
all PAM SELLS 600 CONTRACTS YMM1 TO HEDGE VARIOUS LONG POSITIONS, AT BREACH OF 32,200, GTC --- FOR ALL FUNDS.
robert.p.balanModeratorLeaderOwnerMar 25, 2021 9:36 AM
Here is what driving bond-equity rebalancing, which will be the underlying theme until end of Q4 2021.
S&P Earnings Yield spread over 10Yr yield will continue to shrink, and becomes less competitive vs bond yields until Q4 2021
The Fed's ERP Model suggests that the recent surge in the 10Yr Yield will drive a rebalancing towards bonds away from equities until late Q4 2021
freer7Mar 25, 2021 2:28 AM
JPMorgan says up to $316 billion selling in equites by quarter end
US financial services major, JP Morgan (JPM) has predicted massive selling to the tune of $316 billion as investors are trying to balance their portfolios.
TimK123Mar 25, 2021 2:41 AM
Would that mean all rebalancing would be complete by next Thursday, if it comes to it?
freer7Mar 25, 2021 2:48 AM
Thats the million dollar qn.. So now is messy cos with the front runners, who knows what is priced in and with the pullback lately, does that also reduce the amt of rebalancing needed?
TimK123Mar 25, 2021 11:56 AM
Thanks. Yes I guess the pullback helps to an extent, but most of the gains since Jan 1st have not been wiped out in this pullback, while bonds have fallen. I think a zigzag correction as Robert has laid out this morning seems likely so perhaps a couple of percent more to go.
bumble.beeMar 25, 2021 12:22 PM
robert.p.balan why hedge longs with short YMM when its been resilient?
robert.p.balanModeratorLeaderOwnerMar 25, 2021 12:32 PM
BB -- it may not be if yields fall once again. Of course, you can use any other instrument that you are comfy with.
robert.p.balanModeratorLeaderOwnerMar 25, 2021 1:17 PM
PAM SELLS 600 CONTRACTS YMM1 TO HEDGE VARIOUS LONG POSITIONS, AT BREACH OF 32,200, GTC*This order was filled. **YMM1 -- DONE AT 32,190 SOLD 600 CONTRACTS OF YMM1, AS GENERAL HEDGE OF ALL RESIDUAL LONG EQUITY POSITIONS; FOR ALL FUNDS*
flytightMar 25, 2021 1:19 PM
Good morning. As we can see again this morning, we have swing trades dominating the last week, with price rising at night and price falling during NY trading days. Last night and today is similar. I use a typical 2Hr chart to monitor a week's activity. As you can see from the chart below, the mean price of channel remains FLAT for the week, with price roaming from top to bottom within a 2% margin. So, really not as serious as one might think.
RM13Mar 25, 2021 1:29 PM
SLR deadline will be a nonfactor past March 31st (it will after all be addressed by Fed or the effects of it anticipated by all the players), monthly and quarterly rebalance will be over by March 31st, typically April is positive month in equities as run up into earnings arrives, my view is that downward move in equities will end at the end of March, to set up RUIE run up, that's what market typically does. More bearish now, the better the ramp up into earnings, with yields up theme, JPM/XLF should do well. Now what happens in May or June may be different, but first we have earnings to get through.
nanobrainMar 25, 2021 2:14 PM
As far as I remember , currently many funds are not pinned to specific dates , it`s more vague now. They changed their policies last March/April, when everyone and their mom started frontrunning massive equity/bonds disbalance
TimK123Mar 25, 2021 2:18 PM
EPS trend is still rising, can't hurt.
RM13Mar 25, 2021 2:40 PM
Yes, a lot of end of the month and end of quarter rebalances have now been diluted over time period, but it still has an effect, psychological or direct...
vjapnMar 25, 2021 2:41 PM
Robert, Any update on gold. It seems to have moved down so much because of BTC and with BTC down, is this the time for big gold move up?
robert.p.balanModeratorLeaderOwnerMar 25, 2021 3:03 PM
Gold is getting relief due to the falling yields. So maybe this is a Gold trend for several more days.
RM13Mar 25, 2021 2:03 PM
Delta neutral SPY at 100%, QQQ lower at 56%, still bullish. Futures markets are not seeing the stresses - but they didn't see stresses of rebalances at the end of January and February..
RM13Mar 25, 2021 2:00 PM
The question I have for everyone here - how does reduced treasury issuance for Q2 2021 versus Q1 2021 affect the equity markets? On one hand, 100s of billions of dollars lower issuance will make equities the obvious target where fiscal flows will go into, but how does lower flows through bond market affect primary dealers ability to leverage up on equity side? How is the repo market affected - and its obvious effects on hedge fund leverage?
artbriskMar 25, 2021 3:37 PM
I think reduced growth of liquidity after the Treasury spends most of TCB balance by July, smaller Bank Reserves, reduced M2 Money Supply growth will negatively impact equities and we will see the reflection at some point in the summer. In the meantime, liquidity flowing into private sector and reduced Treasury issuance only helps as it moves into assets other than Treasuries.
RM13Mar 25, 2021 4:10 PM
So that would imply move up in April, into the earning season, and then moves down afterwards, to me... Tax related selling will be postponed into May rather than April, bullish for April..
artbriskMar 25, 2021 4:23 PM
Bigger move down will probably start at some point in the summer. Mostly up and sideways until then, in my view. Also, some tax related selling in April/May.
flamarkMar 25, 2021 2:22 PM
Metals and RTY beginning to to show Negative covariance with yields past 3 minutes.
federergoatMar 25, 2021 2:25 PM
I guess it is time to show that gold is “safe heaven”...
flamarkMar 25, 2021 2:25 PM
I think you are right
flamarkMar 25, 2021 2:28 PM
Bonds are interesting play. If we get continued equity sell off (see JPM) , we then get a flight to safety as well. Im long TN but not enough to offset my equities.
rp7640Mar 25, 2021 4:25 PM
robert.p.balan equities are following your orders in expiated manner - does that mean the uptrend begins sooner as well?
robert.p.balanModeratorLeaderOwnerMar 25, 2021 4:29 PM
No conclusion yet raj -- But note that the yield has not made a lower low -- equities are just frontrunning expectations of lower yields (and lower equities due to the rebalancing).
See you in Asia Friday.
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Here is the current status of the PAM flagship Swing Fund, which includes open and closed trades.
During the twelve months of 2020, PAM delivered phenomenal real-dollar Hedge Fund trading performance, the best at Seeking Alpha:
PAM's flagship Swing Portfolio, year-to-date (December 31, 2020) delivered $100, 181,522.77 net profit on $11,172,813 margin capital.
Year-to-date performance: 860.27%, on 888-98 win-loss trades.
January 2021 spreadsheet here:
February 2021 spreadsheet here:
Year to date 2020 spreadsheet here.
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